The Importance Of International Trade

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International trade is an old subject, but it continues to increase its relevance thanks to the intensification of links between countries. In fact, they are now more than ever interconnected through trade in goods and services, through cash flows and investments. These phenomena increase pervasively due to the growing trend toward globalization. Therefore, many theories, which highlight the gains from trade, were created and then developed and some of them are useful to explain the current international trade.

The first developers, who laid the foundation for further and more recent theories about the importance of trade between nations, were classical economists: Adam Smith and David Ricardo.
According to Salvatore (2012), Smith defined the absolute advantage theory, which states that if country A produces one commodity more efficiently than country B and the
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The difference between this model and the previous ones is that the former doesn’t assume comparative advantage as a law, but it explains this concept (Salvatore, 2010). In fact, the difference in relative commodity prices before trade between countries is caused by different relative factor abundance as well as relative factor prices, which is turned into a difference in absolute factor and commodity prices (ibid). The immediate cause of trade is, therefore, due to the fact that the absolute commodity price differs in the two nations (ibid). Secondly, the H-O model includes the factor-price equalization theorem, which assumes that “international trade will bring about equalization in the returns to homogeneous or identical factors across nations” (Salvatore, 2012, p.82). Hence, if international trade occurs, it will affect the wages and the earnings of homogeneous capital, which are led to be the same in each trading nation

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